Auctions will draw down Chinese cotton stocks to a 5-year low

Chinese cotton stocks will fall to a five-year low, as the government auctions off its huge reserves, the International Cotton Advisory Committee.

The sharp decline in Chinese imports, and falling domestic production, will help draw down stocks even as Chinese demand falls.

The ICAC forecast that a policy of government auctions, and import limitations, will shrink Chinese cotton stocks by 7% in 2015-16, and a further 10% in 2016-17.

The US Department of Agriculture has forecast China’s cotton stocks to fall by 6% in 2015-16, to 13.9m tonnes.

Cotton sales

The Chinese government’s huge stockpiles, accumulated through an abandoned price support scheme, have been hanging over world markets.

Last month the government announced that it will sell up to 2.0m tonnes of cotton between May and August.

Daily sales will be made of up to 30,000 tonnes, with prices based on international and domestic markets in the run up to the sales.

Imports pared to the bone

And China, which up until this year was the world’s top cotton buyer, is set to pare its imports to the minimum levels agreed with the World Trade Organisation.

Import restrictions are expected to shrink Chinese buying by 40% in 2015-17, to 1.1m tonnes, and a further, with a further 13% reduction in 2016-17.

And production in China is expected to fall, thanks to high production costs, with production falling to 4.6m tonnes in 2016-17, down 10% year on year.

The fall-off in production and imports will outweigh falling Chinese demand, which the ICAC saw falling to 6.8m tonnes by 2016-17.

Eyes on auctions

Cotton commentator Louis Rose this week noted that a slow start to China’s reserve auctions, which start this week, could see an increased level of yarn imports into China, which is positive to US sales and values.

And a strong take-up of auctioned cotton, while it could depress prices in the short term, would strengthen US cotton futures prices in the long term, Mr Rose said.

“Ahead of the auctions, we continue to think that China will be diligent in its efforts to drawdown it massive stockpile,” Mr Rose said.

Booming demand

But even as Chinese buying falls off, import demand in other countries, particularly Vietnam and Bangladesh, is booming.

The ICAC forecast world cotton production to increase marginally in 2016-17, as poor prices for alternative crops see growers return to the fibre.